Economy motel chain, Red Lodges is the owner of an economy

Economy motel chain

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Reference no: EM131312277

Red Lodges is the owner of an economy motel chain. Red Lodges is considering building a new 200-unit motel. The estimated cost to build the motel is $8,000,000; Red Lodges estimates furnishings for the motel will cost an additional $700,000 and will require replacement every 6 years. The estimated annual operating and maintenance costs for the motel are $1,000,000. The anticipated average rental rate for a unit is $40/day. Red Lodges expects the motel to have a life of 12 years and a salvage value of $900,000 at the end of 12 years. Furnishings have no salvage value at the end of each 6-year replacement interval. Assume an average daily occupancy percentage of 70% for year 1 and 90% for years 2 through 12, MARR of 12% per year, 365 operating days/year. Ignore the cost of land. Based on a rate of return analysis (show ROR calculations), determine if Red Lodges should build the motel. Why? Please show how to work without Excel.

Reference no: EM131312277

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